Credit Suisse fund to appeal Class X judgement

Credit Suisse Asset Management (CSAM), the Class X noteholder in four legacy Titan Europe CMBS deals, has been granted leave to appeal an April High Court judgement which rejected its claim for additional interest in payments due to it.

Credit Suisse Asset Management (CSAM), the Class X noteholder in four legacy Titan Europe CMBS deals, has been granted leave to appeal an April High Court judgement which rejected its claim for additional interest should be included in payments due.


The appeal is due to be heard during Q4 2016, ahead of the scheduled appeal hearing in another Class X case – relating to the Windermere VII CMBS – which will take place in March 2017.

In May, the Chancellor of the High Court, Sir Terence Etherton, rejected the claim by CSAM that default interest should be included in payments due to the Class X notes in the Titan securitisation.

Class X notes are a contentious feature of CMBS deals. Arranging banks in CMBS 1.0 deals would often extract the ‘excess spread’ between the interest accruing on underlying loans and the amount that accrues on CMBS notes by creating ‘Class X’ securities which they would either retain or sell on. The chief complaint against Class X notes is that the offering documents often contained insufficient disclosure as to how such notes were calculated.

In the Titan case, submissions were made referencing one of four deals – Titan 2006-1 – for convenience. A total of €20 million of default interest had accrued on the deal’s loans since 2011, of which only €3,000 has been paid. Analysts estimated that the interest in that one deal was worth €33.7 million, had CSAM won. The principal amount of Titan 2006-1 was originally €723.3 million with £50,000 of that relating to the X Notes.

The Court of Appeal granted permission to appeal on the basis that: “The Chancellor arguably gave too much weight to what he regarded as the commerciality of the respondents’ construction of the definition in allowing it to displace the more obvious meaning of the words used.  It is not easy to see why in a carefully worded commercial contract the draftsman did not expressly exclude default interest if the words ‘interest rate’ were not intended to include what the Chancellor accepted was ‘interest’.”

The Titan judgement came soon after another High Court rejection of claims on underpayment of Class X notes. Hayfin Opal Luxco, which acquired the notes in the Windermere VII CMBS from a Lehman company. The judge in that case was Mr Justice Snowden.

Chris Webber, partner with law firm Squire Patton Boggs, said that the outcomes of the Titan and Windermere cases have wider implications for how courts approach disputes over the interpretation of complex financial agreements.

Last year, a Supreme Court ruling in the case of Arnold V Britton – a dispute between a leisure park tenant and his landlord over payment of a service charge – placed the emphasis on a more literal reading of financial contracts rather than a focus on contracts’ commercial intent.

Webber explained that although the judges in the Titan and Windermere cases both ruled against the Class X claimants, they did so through different reasoning. In the Titan case, the Chancellor took a ‘commercial intent’ approach, while the judge in the Windermere case focussed on a literal reading of the document.

“The significance and inconsistency of the Class X judgments made them ripe for challenge,” Webber wrote in a blog post. “In [granting the appeal], the Court of Appeal hinted it is concerned with the approach taken by Sir Terence Etherton in the Titan judgment, which contrasts with the Windermere decision in taking much more interest in the commercial consequences of the Class X noteholder’s arguments than the words used in the agreements.”

“It was concerning to see a lack of consistency in the approach of two eminent Financial List judges in two very similar cases heard weeks apart. It now looks like the Court of Appeal may act to resolve the uncertainty in favour of the more literal approach taken by Mr Justice Snowden in the Windermere case,” he added.

The Windermere case was one of the early decisions of the new Financial List division of the High Court, which was set up in October 2015 with the intention of building confidence in the English courts making reliable decisions in complex financial cases. The Titan case was not on the Financial List although the Chancellor is on the panel of 12 judges who will hear such cases.

Webber suggested that the swift listing of the Titan appeal may be significant: “That may be seen as the courts taking prompt action to enhance confidence in their approach sooner rather than later, as the Financial List looks to gain traction in its first year of operation,” he said.